A government report says it's hard for consumers to anticipate and avoid overdraft charges. And sometimes the overdraft charges equal up to a 17,000% loan from the bank.

A government report says it's hard for consumers to anticipate and avoid overdraft charges. And sometimes the overdraft charges equal up to a 17,000% loan from the bank.

Photo: Lisa Poole, STF

Image 2 of 5

In this file photo, Pat Murphy, who was hammered with overdraft fees after Sirius radio unexpectedly charged his checking account.

In this file photo, Pat Murphy, who was hammered with overdraft fees after Sirius radio unexpectedly charged his checking account.

Photo: Michael P. Farrell

Image 3 of 5

Brooklyn resident Subrina Baptiste took out two online loans, only to have her bank allow the lenders to seize her child-support funds to cover overdraft fees.

Brooklyn resident Subrina Baptiste took out two online loans, only to have her bank allow the lenders to seize her child-support funds to cover overdraft fees.

Photo: Michelle V. Agins / New York Times

Image 4 of 5

A 2009 law required banks to only allow overdrafts on debit cards and
ATM withdrawals for people who opt in to the service, and about 1 in 5
checking account users have since opted in.

A 2009 law required banks to only allow overdrafts on debit cards and
ATM withdrawals for people who opt in to the service, and about 1 in 5
checking account users have since opted in.

Photo: Gene J. Puskar

Image 5 of 5

Are overdraft fees just loans with 17,000% interest rates

1 / 5

Back to Gallery

Consumers whose checking accounts are running low generally have two options: don't pay for anything using the depleted account or get a short-term cash infusion from the bank in the form of an overdraft loan. The price, of course, is the associated fee. A new report from the Consumer Financial Protection Bureau, based on account and transaction data provided by banks, gives details on how those people who choose to take the fee end up paying a lot for the overdraft cushion.

The new data finds that the transactions that actually put people over the limit aren't that large. Most of the time, people overdraft on debit cards, and they do so when buying something for less than $24.

And when people do overdraw their accounts, more than half typically repay the funds within three days. Three-quarters do so within a week.

According, to the financial protection bureau, if someone were to pay $34 in fees to borrow $24 for three days, the loan would be at a 17,000 percent annual percentage rate. You could argue that if anything, that understates the problem. The study found that when people overdraw their accounts with a debit card, they typically are short 61.3 percent of the transaction. That means the amount they "borrow" is actually more like $14.71, which in turn would be more like a 28,121 percent annual percentage rate. In any case, not cheap.

A 2009 law required banks to only allow overdrafts on debit cards and ATM withdrawals for people who opt in to the service, and about 1 in 5 checking account users have since opted in. Banks have said that overdrafts are a valuable service that lets people make payments like rent and utilities that they don't want to miss. But the bureau found that 8 percent of customers incur nearly 75 percent of all overdraft fees.

Overdraft fees make up more than half of all checking account fees charged each month - which means that to some degree the people who overdraw over and over are subsidizing free or low-cost checking for other people. Some banks have stopped offering overdraft services entirely, but many, especially smaller banks, continue to depend on the revenue.

The Consumer Bankers Association said the services "are completely optional" and provide an alternative to short-term credit providers such as payday lenders.

Consumer finance bureau Director Richard Cordray says banks and credit unions should be able to offer overdraft coverage, but the research is designed to determine how the programs affect consumers. The bureau's question will be what, if anything, regulators can do to help people from getting themselves into trouble.